I know that constantly complaining about newspaper headlines can get old, but seriously, what's up with this?

This is just flatly wrong. If you read down to the fifth paragraph, you'll find this:

However, the tax increases would be offset by permanently extending the George W. Bush-era tax cuts past their 2012 expiration date, a move that would increase deficits by about $4 trillion over the next decade.

In other words, the net effect of the Republican deal would lower tax revenue by $3.7 trillion over the next decade. Even if you assume that only the top-end tax cuts are really on the table, extending them would cost $700 billion, which means the Republican deal nets out to negative $400 billion.

The headline itself is bad enough, suggesting that Republicans have made some kind of serious deficit reduction offer. But the subhead — which is taken directly from the story's lead — is wildly misleading. The Republican deal doesn't increase tax revenue by $300 billion. It just doesn't.

Sabotaging the Economy, Part 3

Does the public really believe that Republicans in Congress are deliberately trying to sabotage the economy in order to hurt President Obama? Two polls have suggested that about half the country thinks so, but with considerable disagreement about how widespread this belief is. Obviously liberals and Democrats believe this, but do conservatives and Republicans? A Florida poll last week suggested that a surprising number of them do: about a quarter of Republicans and a third of conservatives. But a Washington Post poll that asked a similar question garnered only 9% agreement from Republicans.

Today we have a tiebreaker, courtesy of a PPP poll commissioned by Daily Kos. This is a nationwide poll and asks the question directly:

Until something better comes along, this strikes me as fairly definitive. The question is straightforward and difficult to misinterpret, and the results aren't limited to a single state. Basically, about half of independents — mostly Dem-leaning independents, I'd guess — believe that Republicans are deliberately sabotaging the economy, and about 15% of Republicans believe this about their own party.

In a way that's a surprisingly high number, but it's probably not high enough to really have a big impact. Obama still has some work ahead of him if he wants to push this number high enough to really make a difference.

Smart Cards, Dumb Rules

Matt Yglesias, vacationing in Paris, notes that nobody in Europe uses old-fashioned credit cards with magnetic stripes on them anymore. He tweets:

The answer is actually sort of interesting, and gives me a chance to grumble about one of my longtime hobbyhorses. Basically, smart cards (aka "EMV cards" or "Chip and PIN" cards) are better at fraud prevention. Instead of signing your name on a credit card slip, you put the card into a terminal, enter your PIN number, and off you go. This is better for you because the card never leaves your presence (restaurants, for example, equip their servers with portable card readers), which means nobody can steal your card information. And it's better for the banks because PINs are more secure than signatures and smart cards are harder to forge than old-style cards.

So why don't we have them in America? Well, it's expensive, because merchants would all have to replace their old terminals with shiny new smart terminals. But this is obviously not a very satisfactory answer. After all, you could phase in the new terminals over a period of years, making it part of the usual equipment maintenance cycle. In Europe they seem to think this cost is worth it in order to reduce fraud, so why not in the United States? Here's an article written a few years ago on the subject, prompted by complaints from U.S. travelers that they sometimes have trouble using their credit cards overseas:

In addition to the number of terminals that would need to be changed, many experts say that the cost of fraud in the United States is considered manageable right now, taking away further incentive to change. "I don't think, based on my discussions with big banks that issue most credit and debit cards, or with card associations, that they envision rolling out so-called chip-and-PIN in the U.S. today," [says Don Rhodes, director of risk management policy at the American Banking Association].

But why is the cost of fraud considered "manageable" in the United States? Partly it's because fraud rates have long been lower in the U.S. than in Europe thanks to the nature of our payment network. But there's more to it. It's also because American banks and card companies have successfully pushed a great deal of the cost of fraud onto merchants and consumers. Stricter rules prevent this in most European countries, which means that banks and card companies have a stronger incentive to cut down on fraud and identity theft.

This is the price we pay for loose regulation of the credit/debit card industry. Card companies don't really have much incentive to reduce fraud since they don't pay the bulk of the price for it. In Europe they do, and voila! With profit as an incentive, they figured out a way to reduce fraud significantly. The result is lower costs for consumers and less risk of identity theft.

Wouldn't that be great to have in America too? As a bonus, it would also allow American cards to be used in Europe without hassle. The good news, such as it is, is that Visa and MasterCard might finally be getting on board the smart card train in the U.S., and the Fed could help things along if it were so inclined. New Durbin amendment rules allow card issuers to charge higher interchange fees if they comply with the Fed's fraud standards, and the Fed could make adoption of smart cards part of those standards. If they do, card issuers would have a real financial incentive to make the switch. Stay tuned.

Steve Randy Waldman has a post today which, to simplify a bit, suggests that we're seeing negative real interest rates today because (a) the rich have all the money, (b) there's only a limited number of yachts the rich can buy, so (c) there's a huge amount of money sloshing around the financial system looking for a home. When there's a lot of supply and not much demand, prices go down, and that's what's happening to the price of money.

Paul Krugman objects, and shows us this chart of the national savings rate:

Krugman explains his objection like this: "I have a problem with this [story], for one simple reason: any such story, basically an underconsumptionist story, would seem to depend on the notion that rising inequality has led to rising savings. And you just don’t see that....Obviously it jumped up after the housing bust, but until then it was actually declining, and even now it’s below historic highs. I just don’t see how to make the underconsumption story work."

I guess I see something different. Starting around 1980, which is exactly when income inequality in America started to gap out, savings steadily fell. Fundamentally, what this represents is two things: the rich accumulating most of the gains of economic prosperity while the middle class suffered from sluggish wage growth. The rich couldn't really use that gusher of new money, so for 30 years they loaned it out to the middle class in increasingly Byzantine ways, and the middle class used these loans to sustain the steadily improving lifestyle they had gotten accustomed to. In 2008, this game of musical chairs came to a sudden end and the middle class stopped borrowing. And guess what? The rich still couldn't spend all that extra money. If they could, the savings rate would have stayed low. Instead, it shot up. The middle class was borrowing less, and the rich, left with no customers for their money, couldn't find anything to spend it on either. So now they're saving it. In other words, the underconsumptionist story starts in 2008, not 1980.

I don't want to pretend that this is the whole story. Yes, trade deficits play a role in all this. Demographics play a role. Oil plays a role. It's crankery to insist on monocausal explanations for complicated problems. But I think that growing income inequality plays a role too. The rich are continuing to collect huge sums of money, but they can't spend it all; they can no longer loan it all out; and there aren't enough good real-world investments out there to sop it all up either. So it's piling up and driving down real interest rates.

But this raises another question: why aren't there enough good real-world opportunities to soak up all this money? Answer: Because there's not enough expected future demand to justify expanding factories and hiring more workers. And why is that? Because for the past decade middle-class wages haven't just been growing sluggishly, they haven't been growing at all. But with wages stagnant and the great credit machine now turned off, middle-class consumption is necessarily going to be flat. That's just arithmetic. And without growing consumption from the middle class, consumption just isn't going to grow much.

For 30 years, the rich could ignore all this because Wall Street magically recycled income inequality and turned it into gold. That couldn't last forever, though, and 2008 turned out to be the year the train ran off the rails. At this point, then, the rich have only a few choices. They can lose interest in the United States and find other countries to invest their money in. They can let the middle class wilt and just hang on to their riches. Or they can understand the dynamics of a mixed capitalist economy and figure out a way to return to an era of shared prosperity, where everyone gets richer at about the same rate and the middle class provides a growing market for the investment dollars of the wealthy.

I'd like to think that eventually the rich are going to choose Door #3. Unfortunately, there's very little sign of that. It's not clear to me how this story ends.

Quote of the Day: Sarkozy Unloads on Netanyahu

From French president Nicolas Sarkozy, overheard talking to Barack Obama about Israeli prime minister Benjamin Netanyahu during last week's G-20 summit:

Sarkozy: I cannot stand him. He is a liar.

Obama: You're fed up with him but I have to deal with him every day.

Netanyahu, unsurprisingly, has declined to comment.  

Republicans Get Even Weirder

We have a shiny new offer on the table from the supercommittee Republicans:

Under the proposal, Republicans would agree to limit certain itemized tax deductions in return for a permanent reduction in marginal tax rates. This would not just extend the 2001 and 2003 tax cuts, but reduce the rates that apply to each additional dollar of a taxpayer’s income.

In other words, its net effect would be to lower tax rates on the rich and, almost certainly, reduce revenue and make the deficit worse. In return for this, Democrats would get — what? Bigger spending cuts to make up for handing over more money to the rich?

It's easy to be snarky about this, but seriously: what's the deal here? Republicans can't possibly think this would be a more attractive deal than simply doing nothing, can they? So what is this? Evidence of a Michael Corleone-style of negotiation? Plain ignorance of what their own plan would mean? Open contempt for Democrats? A rational belief that Democrats are terrible negotiators and might buy their plan out of desperation?

What's going on here?

The Spotlight Moves to Italy

In a sense, the problem with Greece has never really been about Greece. A Greek collapse, even a total one, would be bad news for Europe but it would be manageable bad news. Greece is small enough that the EU could bail them out completely they had to.

(Whether they'd want to is another question entirely. But they could afford to if push came to shove.)

The bigger problem is that problems in one wobbly country make investors freshly nervous about Europe's other wobbly countries too, and last week's psychodrama in Athens has made them very nervous indeed. In particular, it's made them nervous about Italy, which has tons of debt and a clownish prime minister who makes Herman Cain look like a statesman. As a result, nobody wants to buy Italian bonds, which means that Italy has to offer higher and higher interest rates to attract buyers. But higher interest rates make it even harder for Italy to ever pay off its debt, which makes investors even more nervous about getting repaid, which sends interest rates even higher, etc. etc. This eventually leads to collapse, and Italy is big enough that the EU can't easily bail them out even if they want to.

But wait! There's more. The Wall Street Journal explains what happens when Italian bond rates go up and the spread between Italian rates and German rates widens:

In some ways, the widening of that spread has caused a vicious selling cycle thanks to rules that govern the use of government debt as collateral for borrowing money, otherwise known as repurchase, or repo, agreements.

Analysts point to the rules set by LCH.Clearnet Group Ltd., the main clearinghouse for repurchase agreements. LCH.Clearnet requires higher collateral for repo trades involving government bonds that yield 4.5% more than a basket of triple-A-rated European sovereign bonds for five consecutive days. Market watchers said Italy is on the cusp of falling into that riskier bucket....Should the collateral requirements be triggered, it would make Italian debt less attractive for banks and investors who use their holdings as a cheap way to borrow money. Some market watchers said there has been selling of Italian debt in anticipation of the stricter guidelines.

This is sort of a special case of the more general vicious cycle described above. Basically, it's like a run on the bank, and it's the same dynamic that brought down Bear Stearns and Lehman Brothers. The vicious cycle in cases like this tends to accelerate toward the end, which is why Bear and Lehman collapsed within a week once their weakness became apparent. Sovereign countries are a little better off in this regard, but not a lot. If investors become convinced that Italian bond yields are going to continue widening, it becomes, first, a self-fulfilling prophecy, and then a full-scale panic. Last week was all about Greece. This week might be all about Italy.

Where the Money Is

As a public service for readers who are planning to enter college soon, here's a list of the 25 top-paying majors. If you want to make a lot of money, it turns out your choices are pretty simple. You can major in business and roll the dice on becoming a top trader/rainmaker on Wall Street, or you can just buckle down and major in some kind of engineering. It doesn't matter much what it is, though petroleum engineering is surprisingly lucrative. And be sure to stay away from being a high school guidance counselor. The full sortable list is here.

The Great Rocketfish Power Adapter Mystery

Apple Computer seems to think that $50 is a fair price for a spare iPhone charger, so I headed off to Best Buy today to see if I could find something more reasonably priced. And I did. But can anyone explain this?

On the left, you can buy a power adapter plus a cord for $21.99. On the right, you can buy just the cord — the exact same cord — for $24.99. Surely there's a breakdown of the free market at work here. But of what nature, exactly?

Solar Power and its Discontents

Can solar power ever get cheap enough to compete with fossil fuels on a level playing field? Photovoltaic solar cells are getting cheaper a lot faster than most people realize, and last week I posted this chart originally constructed by Ramez Naam:

Naam refers to this as "Moore's Law" for solar: in the same way that electronic components get steadily cheaper every year, so will the cost of solar. He estimates that the price of solar has declined at a fairly steady 7% per year for the past three decades, and if that continues, then solar will compete with fossil fuels by 2020 or so and will be significantly cheaper by 2030. This sounds great, but Joshua Gans urges caution:

Think about what that means for environmental policy. If we believe Moore’s Law in solar, then the safe bet in terms of behavioural reactions is not to react. Within a decade or two, energy will be socially as cheap as it is privately as cheap now. That means that changing habits for environmental austerity is not the way to go.

In other words, why bother conserving if solar is going to get so cheap that we'll have all the clean electricity we need within a couple of decades? This comes via Tyler Cowen, who makes a different point:

If a solar breakthrough is now likely, in which market prices do we see it reflected?....Is there any reason, based in industry-wide market prices, to be optimistic about the near-term or even medium-term future of solar power? I don’t see it.

I don't see it either, but I think the correct answer to both of these objections is the same: everything is uncertain. The reason we should keep pushing on conservation and efficiency is because solar might not follow a Moore's Law of its own. The progress so far can make us hopeful on this score, but it can't make us so certain that we're willing to put all our eggs in a single solar basket.

That same uncertainty is the answer to Tyler's point as well: the power industry hasn't reacted to the drop in solar prices because the industry is still uncertain it will happen. And there's more. The price of solar has been dropping exponentially for 30 years. That's not a prediction, it's a historical reality, and yet the power industry hasn't so much as blinked. So why should we expect them to react to it now? The fact is that industries routinely fail to react to technological competition until it's literally on their doorstep — or even tromping through the door and plonking down on the sofa to make itself comfortable. Hell, IBM stock continued to rise all through the 80s. It wasn't until 1987 that investors finally figured out what technologists had known for years, namely that those newfangled PC things might put a serious damper on the growth of big proprietary systems.

Solar power looks likely to get a lot cheaper over the next decade or two. That's good news for residents of planet Earth and bad news for fossil fuel suppliers, but neither group should bet the ranch on it happening. For Earthlings in general, this means we should stay focused on lots of different ways of reducing carbon emissions just in case solar doesn't pan out. For fossil fuel suppliers, it means they should spend some time hedging their bets, but not much more for now. For investors it means — well, different things for different investors. If you think it's likely that the price of solar will keep falling, you should figure out ways to invest in solar. If not, not. Right now, price parity is far enough off that only a few far-sighted investors with lots of appetite for risk are likely to spend significant sums betting on it, which in turn means that broad markets aren't yet affected.

And they might never be. It all depends. But the fact that they aren't reacting yet to something that's at least ten years off doesn't really tell us much about how promising the solar market is. All it tells us is that most investors don't really have very long time horizons.